Tuesday, May 27, 2014

The Social Security system is in grave financial trouble — in worse financial shape now than in 1983 when the Greenspan Commission "fixed" the system's finances. It’s also in worse shape than Detroit’s two pension systems, taken together. According to the Social Security Trustees (Table IV.B6, “Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon, Based on Intermediate Assumptions,” in the 2013 Trustees Report), the system is 32% underfunded, notwithstanding its $2.7 trillion Trust Fund.

In short, an immediate and permanent 32% hike in the Social Security payroll tax rate (from 12.4% to 16.4%, forever) is needed to pay the existing benefits. Alternatively, an immediate and permanent 23% cut in all OASDI benefits would provide long-term solvency.

The Social Security Administration's (SSA's) Modeling Income in the Near Term (MINT) estimates income/wealth of future retirees. Estimates are based on demographic information from the Survey of Income and Program Participation: individual earnings histories and projections of interest rates, wage growth, mortality rates, and disability rates. Historically, MINT simulations were based exclusively on SSA's Office of the Chief Actuary's (OCACT's) intermediate-cost projections of key demographic/economic variables. The authors present the results of a sensitivity analysis in which they ran MINT using OCACT's low-cost/high-cost projections of mortality and disability trends. Those simulations estimated characteristics of the population aged 65 or older in 2040 under alternative projections of mortality/disability trends. The authors then describe simulations in which future real rates of return on stocks held in retirement accounts differ from the historical mean real rate of return used in baseline simulations. Sensitivity analyses can help MINT users choose model parameters with the greatest impact on simulation results.

Tuesday, May 13, 2014

Today, Florida Sen. Marco Rubio unveiled his ideas to improve retirement security, including plans to make Social Security solvent, and encourage delayed retirement and increased retirement saving. (Full disclosure: I advised his staff on the plan and have written in favor of some of the provisions.)

Included in Sen. Rubio’s ideas are:

· Social Security solvency: Rubio would gradually increase the retirement age in line with life expectancies and reduce the growth of benefits for higher-earning individuals. In addition, Rubio favors strengthening the safety net for lower-income retirees.

· Delayed retirement: Rubio would eliminate the 12.4 percent payroll tax for retirement-age individuals to encourage them to stay in the work force. I really like this idea and wrote on it for the Wall Street Journal.

· Open the TSP: Rubio would allow workers who are not offered retirement plans by their employers to participate in the federal government’s Thrift Savings Plan, the DC pension for government employees. In a way, this builds upon the President’s MyRA proposal, but allows for greater choice in investments.

Agree or disagree, we need more people putting ideas on the table. Click here to read my National Affairs article on how to fix Social Security and improve retirements.

This paper examines the most recent U.S. Census Bureau data on labor-force participation among Americans ages 55 and older in 2013, including an analysis of the trends following the economic recession that started in late 2007-early 2008 and the slow recovery thereafter. The labor-force participation rate measures the fraction of individuals within a specific group (in this case those 55 or older) who are working or actively pursuing work. The first section uses annualized data on labor-force participation from the Current Population Survey (CPS), available from the Bureau of Labor Statistics website. However, these data provide only an overall picture, with few specific demographic details. In order to examine additional demographic trends of the U.S. population, the second section uses data from the March 2013 Supplement to the CPS. The labor-force participation rate for those ages 55 and older rose throughout the 1990s and into the 2000s, when it began to level off but with a small increase following the 2007-2008 economic downturn. For those ages 55-64, the upward trend was driven almost exclusively by the increased labor-force participation of women, whereas the male participation rate was flat to declining. However, among those ages 65 or older, the rate increased for both males and females over that period. This upward trend in labor-force participation by older workers is likely related to workers’ current need for continued access to employment-based health insurance and for more years of earnings to accumulate savings in defined contribution (401(k)-type) plans and/or to pay down debt. Many Americans also want to work longer, especially those with more education for whom more meaningful jobs are available that can be performed into older ages. Younger workers’ labor-force participation rates increased when that of older workers declined or remained low during the late 1970s to the early 1990s. But as younger workers’ rates began to decline in the late 1990s, those for older workers continuously increased. Consequently, it appears either that older workers filled the void left by younger workers’ lower participation, or that higher older-worker participation limited the opportunities for younger workers or discouraged them from participating in the labor force. The PDF for the above title, published in the April 2014 issue of EBRI Notes, also contains the fulltext of another April 2014 EBRI Notes article abstracted on SSRN: “Characteristics of the Population With Consumer-Driven and High-Deductible Health Plans, 2005-2013.”

This Article examines the principal reform proposals that would increase tax revenue for the Social Security trust fund — weighing the pros and cons of each. The Article also considers the prospects for political agreement on a reform proposal given the past efforts and the looming crisis. Part I of the Article recounts the latest data as of 2013 on insolvency projections and discusses the methods by which the Office of the Chief Actuary measures the effect of proposed reforms. Part II provides an overview of the payroll tax and benefit calculations. The factors used in calculating both tax and benefits are key components used in many reform proposals. The Article focuses on two types of tax reform proposals: (1) proposals that increase the tax rate, which are the subject of Part III; and (2) proposals that increase the maximum taxable income rate, which are discussed in Part IV. Part V examines the political realities of reform proposals and suggests ways in which political bargaining can be structured to maximize the chances of a proposal being adopted.

The continuous improvements in mortality rates and life expectancy in the last century have been given particular attention from academics, life insurers, financial engineers and pension planners, particularly in developed countries. Mortality-linked securities such as longevity bonds, survivor swaps or mortality forward have appeared recently in the industry to help operators to hedge such risks. It appears to be crucial to improve the accuracy of future life expectancy. In this paper, we investigate time varying dependency associated with common trends which drive regional life expectancy within Canada. We aim to compare the three main models appeared recently in literature such as autoregressive integrated moving average (ARIMA), vector autoregressive model (VAR) and the vector of error correction model (VECM), to analyse the common factors that have determined a progressive shift of life expectancy in six Canadian regions. The latter shows better performance over VAR and ARIMA in terms of backtesting and ability to capture the dynamics of common life expectancy. These results contrast with what has been done in the existing literature. Findings from this analysis are useful for local insurers in their goal to project life expectancy improvements and also to forecast the future trends.

The inclusion of employer-sponsored health insurance (ESI) in taxable income would increase income and payroll tax receipts, but would also increase Old Age, Survivors, and Disability Insurance (OASDI) benefits by adding ESI to the OASDI earnings base. This study uses the Urban Institute’s DYNASIM model to estimate the effects of including ESI premiums in taxable earnings on the level and distribution by age and income groups of income tax burdens, payroll tax burdens, and OASDI benefits. We find that the increased present value of OASDI benefits from including ESI in the wage base in 2014 offsets about 22 percent of increased income and payroll taxes, 57 percent of increased payroll taxes, and 72 percent of increased OASDI taxes. The overall distributions of taxes and benefits by income group follow the same pattern, with both taxes and benefits increasing as a share of income between the bottom and middle quintiles and then declining as a share of income for higher income taxpayers. But households in the bottom income quintiles receive a net benefit from including ESI in the tax base because their increase in OASDI benefits exceeds their increase in income and payroll taxes. Over a lifetime perspective, all earnings groups experience net tax increases, but workers in the middle of the earnings distribution experience the largest net tax increases as a share of lifetime earnings. Higher benefits offset a larger share of tax increases for lower than for higher income groups.

South Africa has a large social assistance programme that plays a critical role in addressing extreme poverty. The strong constitutional rights framework, including a right to social security, underpins the development of this programme. Women are the major recipients of social assistance grants but in most cases collect grants for the benefit of their children (in the form of Child Support Grants). Working age people who are able-bodied are not provided with social assistance despite the high levels of unemployment in the country. Women, who are poorer with less access to paid work, are most disadvantaged by this gap. A recent move to attach conditions to the Child Support Grant is analysed from a gender and human rights perspective. The article considers some of the arguments relating to ‘conditionality’ in social security and finds that this move is unnecessary, impractical and a possible violation of human rights as well as a worrying trend in a system that has previously made little use of conditions. The article concludes by proposing a deliberative process of ensuring that the social security right becomes a gender-responsive vehicle for fundamental social change.

Progressives like to claim, as Senate Majority Leader Harry Reid has said, that “Social Security has contributed not a single penny to the deficit. So we can talk about entitlements as long as you eliminate Social Security." AARP CEO Barry Rand claimed, "The fact is, Americans pay for Social Security, and it hasn't added one dime to the deficit."

As I explained at Real Clear Markets, this argument isn’t just wrong, it’s basically a BS line used to pretend that we don’t need to make the tough choices required to fix Social Security.

But you don’t need to take my word for it: former Treasury Secretary Timothy Geitner, in his new book Stress Test, recounts being asked to parrot the “not a dime” line for the Sunday talk shows. To his credit, Geitner refused:

“I remember during one Roosevelt Room prep session before I appeared on the Sunday shows, I objected when Dan Pfeiffer wanted me to say Social Security didn't contribute to the deficit. It wasn’t a main driver of our future deficits, but it did contribute,' he says. 'Pfeiffer said the line was a 'dog whistle' to the left, a phrase I had never heard before. He had to explain that the phrase was code to the Democratic base, signaling that we intended to protect Social Security.”

The problem is, this “dog whistle” also signals to everyone else that you’re not committed enough to entitlement reform to give it to people straight.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.